Plunging Oil Price Good for the BC Economy in 2015…

January 12, 2015
Ken Peacock

The rapid and steep decline in world oil prices has prompted a fair amount of commentary on the accompanying economic impacts. For Canada, much of the analysis points to modestly negative economic implications, stemming from reduced business investment, lower corporate revenues, a decline in the value of exports, and diminished job creation in the oil patch. Lower oil prices also translate into a decline in revenues flowing to the federal government and to provinces like Alberta and Newfoundland. Some analysts are more sanguine about the consequences, pointing to offsetting effects from the boost to consumer spending and other factors that result from the savings at the gas pump.

For BC, the near-term economic effect of tumbling oil prices is much clearer – this is a positive macro-economic development that will help lift BC’s economy in 2015. We do produce a small amount of oil in BC, but the volumes are insignificant and there is little direct impact in terms of government revenues or scaled back capital investment. On the other hand, there are numerous channels through which benefits will come.

The most significant is for consumers. According to Statistics Canada’s Household Expenditure Survey, in recent years the average household in BC spent between $2,100 and $2,300 on gasoline. In 2013 and much of 2014 gas prices in the Metro Vancouver averaged $1.40 per litre. In mid-2014 gas prices peaked around $1.50. Today, gas at the pump is selling for barely $1 per litre, which translates into a 25% to 30% reduction in fuel costs for vehicle owners. If gas prices average $1.04 for 2015, a typical household in BC could save $550 on its annual fuel bill. With 1.8 million households in the province, lower gas prices could translate into economy-wide savings for consumers of more than $1 billion. Some of this may be saved, but most of it will be spent on other goods and services, boosting activity in the retail, hospitality and other consumer service sectors.

Lower oil prices also put downward pressure on the loonie. BC also benefits through this channel because a decline in the value of the dollar relative to the US dollar makes exported goods and services (including those related to tourism) more competitive in US dollar terms. Layer on the fact that lower energy costs will give additional impetus to the already solid US economic expansion, and it is safe to say BC exporters will benefit from the drop in oil prices.

Some more modest benefits will also flow to consumers because lower gas prices also mean lower transportation costs for businesses. A drop in energy prices translates into lower economy-wide inflation and outright price reductions for many products, as retailers ultimately pass on the savings from substantially lower shipping costs. Some of this savings will be offset by the fact a lower loonie also means higher costs for imported items, but on balance falling energy costs will lead to lower inflation and better prices for consumers.

We expect that capital spending and construction in Alberta will decline in 2015 as the oil patch retrenches amid plummeting oil prices (natural gas prices have also recently fallen). With tens of thousands of British Columbians working in the Alberta energy sector, some BC households will be affected as business activity and investment in the oil industry contract. A lower level of activity in Alberta’s formerly buoyant oil sector also means more skilled workers will remain in BC which could help to ease worries about labour shortages in this province.

The bottom line is the fall in global oil prices will benefit BC’s economy and support an improved growth performance in 2015. The one cautionary note is that the turmoil sweeping oil markets may impinge on the pace and extent of LNG development in the province. The buying and selling of LNG in Asia is based on long-term fixed contracts that are indexed to the price of oil. Although LNG projects are long-lived multi-billion dollar investments, the current energy pricing environment may well prompt LNG proponents to proceed more cautiously and further delay final investment decisions.

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